Peak Oil Review - July 18

1. Oil and the Global Economy

Oil traded between $94 and $100 last week as the markets balanced worsening economic news across much of the OECD against continued Chinese growth and a slowly tightening global oil supply situation. NY oil closed out the week at $97.24 and in London Brent remained $20 higher, closing at 117.26. The week was dominated by the ever-expanding EU sovereign debt crisis and Washington’s feuding over the debt cap. This week the rating agencies weighed in by lowering debt ratings of some EU members and threatening to lower the rating on the US debt unless the ceiling limit is raised.

Although Federal Reserve Chairman Bernanke played down the need for further quantitative easing which could push oil prices higher, many traders are worried that worsening US economic conditions could force another round.

The weekly US stocks report showed an unexpectedly large drop in US gasoline and crude stocks.

The IEA confirmed this week that the Saudis pumped 700,000 b/d more in June than in May; however, about half of this increased production was consumed by the Saudis themselves to satisfied increased demands for air conditioning and desalinization. Saudi refinery input increased by 250,000 b/d last month and much crude was burned in thermal power plants.

Barclay’s Bank joined the IEA and EIA in warning that global oil supplies are likely to become much tighter in the second half of this year. Barclays does not see Libyan oil production rising to previous levels for several years, sees the Saudi’s spare capacity eroding quickly and no end in sight for increasing demand from China and other growing countries.

As US gasoline inventories fall, prices are rising again. Although retailing for about 22 cents a gallon cheaper than in early May, it is still 95 cents a gallon higher than last summer. Hot and humid weather across much of the eastern US is forcing natural gas prices higher as the demand for air conditioning approaches record levels.

2. Middle East

Although little happened in the region last week that directly affects oil exports, developments in several countries do not bode well for the future. In Syria anti-government demonstrations last week that took place in several cities were among the largest since the uprising began in March. At least 28 demonstrators in several cities were killed when security forces fired on crowds. The government claims that an explosion along a key gas pipeline was an “accident.”

The fourth attack on the Sinai gas pipelines since the Egyptian uprising has once again left Israel, Jordan, Syria and Lebanon short of natural gas for their power stations. Although the Israelis can compensate with increased imports until they can develop their own natural gas supply, the Jordanians are in much worse condition. Amman is said to be considering an Iranian offer to supply the kingdom gas through the pipeline that supplies Iranian gas to Turkey and Iraq.

There was movement on the Libyan situation last week as rebel forces moved closer to Tripoli from the western mountains and the US and 31 other nations recognized the Transitional National Council as the legitimate government of Libya. The Transitional Council, however, was not given access to the estimated $160 billion in Libyan government financial assets held in institutions around the world.

Months of NATO air attacks have left the Gadhafi government with very little in the way of heavy military equipment. Food and fuel supplies are running short in Tripoli and the Gadhafi regime has already extended feelers in a search for a settlement that would exempt the Colonel and his closest associates from standing trial in an International court for crimes against humanity.

Rebel forces do not have the strength to overrun Gadhafi loyalists in Tripoli who fear retribution should they be captured. Short of a negotiated settlement, the situation is likely to continue for some time. Even a settlement of the conflict does not mean that the situation would be stable enough for oil exports to return to pre-uprising levels.

Yemen’s economy is on the verge of collapse as attacks on its electrical and oil infrastructure have left the country with serious shortages of power, gasoline, and food. A failed state of 24 million disaffected people along the borders of Saudi Arabia and Oman will not be good for regional stability or oil exports in the long run.

3. Global energy shortages

The steady drumbeat of reports of energy shortages, in some cases serious, around the world continued last week. The causes of these shortages remain diverse – from hydro power-stopping droughts, to strikes, unaffordable oil prices, rapid population and demand growth, nuclear accidents – the list goes on and on.

The most serious problem remains in Pakistan where the Chairman of the National Power Authority reported that the country is only producing half of its generating capacity due to the lack of money to pay for fuel. Foreign investors have started to transfer their operations to other Asian countries due to the prolonged power outages. One estimate has Pakistan’s industrial production down by 20 to 25 percent.

Japan’s energy problems are increasing. A new report says that, should the country shut down its nuclear reactors in response to public anxiety, the power shortage could not be made up by increased fossil fuel generation. Last week another Japanese nuclear power reactor was shut down due to a malfunction. There are already reports of Japanese manufacturers considering moving production overseas where the electric power situation is better.

Moving beyond the major situations, the Bahamas now have rolling blackouts; South Africa has an ongoing strike; Mozambique has grounded airline fights due to a jet fuel shortage; Uganda has 12 hours a day of load shedding as it cannot pay for fuel; and the list goes on. The bottom line is that there are dozens of countries where a combination of droughts and high oil prices means that electricity and motor fuels are no longer affordable.

4. China

A country with 1.3 billion people growing at 9+ percent a year cannot go through a week without releasing some sort of news that affects the global oil situation. Last week’s stories were GDP growth and the trade balance. Despite months of belt-tightening in an effort to control rampant inflation, particularly in food prices, China managed to come up with a GDP growth rate of 9.5 percent in the second quarter – down a bit from the 1st quarter, but above economists’ expectations.

Some commentators saw the 9.5 percent which was the lowest quarterly growth rate in nearly two years as evidence the China’s growth is slowing, while other thought it a remarkable accomplishment in the face of interest rate and reserve requirement increases and the electric power shortages, droughts, and floods the country has been through in the last three months. The government’s statistics bureau noted that GDP growth actually accelerated slightly in the quarter with a key industrial index increasing by 15.1 percent in June from a year earlier. China’s electricity consumption in the 1st half was up by 12.2 percent over 2010, including a 12 percent increase in industrial use which is about 62 percent of China’s consumption.

While the growth in China’s foreign trade slowed to the lowest rate of increase in 20 months, imports still rose by 19.3 percent and exports by 17.9 percent in June. It seems as if there is a lot of room for more belt-tightening and increased oil and coal imports in the six months. The energy for a 12 percent increase in electricity consumption has to come from somewhere – increased efficiency, domestic production, or imports.

Quote of the week

"We will aim to bring about a society that can exist without nuclear power." -- Japanese Prime Minister Naoto Kan

The Briefs

Japan's Prime Minister Kan has called for his country to develop into a nuclear-free society, amid rising public anger at the continuing crisis at the Fukushima Daiichi plant. In a televised news conference, Mr. Kan said his government would try to phase out nuclear energy in stages. (7/13, #24, #25)

Japan's nuclear power operating rate averaged 37% in June, falling below 40% for the first time in more than 30 years, as many utilities were unable to restart reactors after regular maintenance amid fears over nuclear energy and disagreements within the government on criteria allowing reactor operations. (7/12, #22)

Deaths from heatstroke in Japan quadrupled in the early part of summer as temperatures rose and air conditioners were switched off in line with government appeals to curb electricity. From June 1 to July 10, 26 people died from heatstroke, compared with six in the same period last year. (7/13, #26)

The CEO of Total said that oil prices are trending upward while refining margins are weak. "The trend at the moment is for prices to rise as fundamentals point to more energy demand," Christophe de Margerie said on a Saturday panel at a conference in southern France. (7/11, #5)

World oil consumption is expected to rise by 1.32 million b/d in 2012 as the global economy expands by 4.1%, boosting demand for OPEC crude, OPEC said in its latest monthly oil market report. Global oil demand is expected to average 89.5 million b/d in 2012, up from 88.18 million b/d in 2011, OPEC said. (7/13, #7, #8, #9)

Abu Dhabi has agreed to increase oil exports to China to 200,000 b/d. The national oil company will provide more crude to China National Petroleum Corporation starting in 2014. The deal follows a 2009 agreement between the two companies to cooperate on oil trading, shipping and storage. (7/16, #8)

Venezuelan President Hugo Chavez said on Friday he would return to ally Cuba for chemotherapy, raising doubts about his fitness to fight for re-election next year in the OPEC-member nation. (7/16, #17)

Seaborne shipments from the Middle-East members of the Organization of the Petroleum Exporting Countries, excluding Angola and Ecuador, are set to rise by 170,000 barrels a day in the four weeks to July 30, U.K. tanker tracker Oil Movements said Thursday, as a pledged Saudi output boost starts showing up in seaborne exports. (7/15, #4)

Brazil's oil reserves, including recent discoveries in deep waters of the Atlantic Ocean, are of a similar size to those found in the North Sea, said an exploration official at Petroleo Brasileiro. The U.K. and Norway held about 62 billion barrels of reserves in the North Sea before the deposits were developed. (7/15, #8)

ConocoPhillips said it suspended production at an offshore oil field in China, complying with an order from Chinese regulators citing slow progress in containing a five-week-old leak. Conoco estimated the amount of leaked oil at between 1,500 and 2,000 barrels. (7/14, #14)

Two weeks after its grand opening that showed off China's hopes for a bright hi-tech future, a flagship high-speed rail line between Beijing and Shanghai has already left passengers stranded for hours on stuffy trains due to power outages. The first cut was caused by lightning hitting the overhead line, while the second remained unexplained. (7/14, #15)

The China National Petroleum Corp is discussing with Cuba the possible leasing of one or more offshore exploration blocks in Cuban Gulf of Mexico acreage, a Cuban state oil company official said. (7/14, #16)

China, the world's largest energy user, plans to more than double production of its coal-bed methane in five years by 2015 to cut reliance on oil and coal. The country aims to increase its annual output to 21 billion cubic meters by 2015 from 8.6 billion cubic meters in 2010. (7/15, #9)

ConocoPhillips will conclude a three-year restructuring program by shedding its fuel-making business next year to refocus the company on more profitable oil and natural-gas production. (7/15, #12)

Canadian Natural Resources Minister Oliver said the nation will seek to grow energy sales to China, and challenge environmentalists in the US and Europe, to sustain demand for the world's largest reserves of oil outside the Middle East. (7/15, #13)

Oil companies operating in the UK North Sea drilled 43 percent fewer wells, in part because of a tax increase. Deloitte Touche Tohmatsu said operators drilled 20 exploration and appraisal wells in the period, down from 35 a year earlier. That's the lowest rate since 2002. (7/15, #14)

Nigeria's crude oil export has recorded a major boost as Shell Petroleum Development Company has lifted force majeure on about 300,000 barrels per day of Bonny Light crude. With the lifting of the force majeure, Nigeria's total production capacity, including condensate, stands at about 2.6 million barrels per day. (7/14, #10, #11)

Mexico's state-owned oil company says crude production fell by about 1 percent in the first half of 2011. The company says daily output dropped to about 2.56 million barrels in the first six months of 2011, about 27,000 barrels lower than the same period of 2010. (7/14, #13)

Halliburton said it had won a contract to help Chevron tap into Poland's shale rock formations in search of natural gas. Halliburton is the leading player in hydraulic fracturing of shale in the US, where the controversial technology has been used to unlock gas that was too difficult and expensive to tap only a decade ago. (7/14, #23)

Consulting engineers have estimated a midrange of 636 million bbl of recoverable oil at Tawke field in the northern part of Iraqi Kurdistan. (7/13, #12)

Iraq's Oil Ministry initialed a draft contract with Shell and Japan's Mitsubishi to form a joint venture company to gather and utilize associated gas produced in southern Iraq, in a deal worth an estimated $12 billion that could eventually pave the way for future LNG exports. (7/12, #9) (7/13, #13)

US President Barack Obama issued an executive order establishing an interagency working group to coordinate federal agencies' efforts in overseeing onshore and offshore oil and gas development in Alaska. The group will be chaired by Deputy US Interior Sec. David J. Hayes. (7/13, #28)

Iran will start exporting natural gas to Oman through an undersea pipeline by March 2012. Iran and Oman have signed the initial contract for the gas transfer but the final contract will be signed by the end of the current Iranian calendar year that ends on March 20, 2012. (7/12, #10)

Kuwait is no longer eager to possess nuclear technology or to seek nuclear power for energy purposes, according to Deputy Prime Minister Al-Sabah. (7/12, #11)

China will continue to phase out unneeded industrial capacity this year, with 2,255 enterprises closing down, while the government fights the worst power shortage. Obsolete production capacity in 18 major industrial sectors - including iron, steel, coke, cement, flat glasses, paper making as well as printing and dyeing - will be eliminated. (7/12, #17)

Fifteen companies, ranging from major refiners to trading companies and banks, were awarded contracts to buy all 30.64 million barrels of sweet crude oil offered in the US government's emergency sale. (7/12, #25)

Malaysian exports of crude oil fell 33% year on year in May to 266,000 b/d, but imports dropped further and the country remained a net exporter for the second month in a row. (7/11, #13)

Tom Whipple is one of the most highly respected analysts of peak oil issues in the United States. A retired 30-year CIA analyst who has been following the peak oil story since 1999, Tom is the editor of the daily …

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